A Bitcoin Correction, or a Complete Collapse?

If ever there were a traded market rife with hyperbole it is the cryptocurrencies, and bitcoin in particular. Targets range from $25,000 to $40,000 and higher. Eclectic cybersecurity trailblazer and 2016 Libertarian presidential candidate John McAfee thinks the right number is $1 million.

On the other side, some look for a complete bust. Don’t forget, bitcoin closed out 2016 at about $973. Compare that to its recent range of $14,000-$16,000. A 90% collapse would still put it in the plus column for 2017.

Just the fact that I could not report a singular recent price is just more proof that something is different here. However, something that is never different is the madness of crowds. In other words, people, whether they are traders, speculators or investors, tend to do the same things when faced with similar situations.

Since my last report on the subject a month ago when I thought applying regular technicals was problematic, I’ve been watching bitcoin trade on the Bitstamp exchange on an hourly basis. What became incredibly obvious was that it formed intraday technical patterns and reached technical targets almost perfectly.

For example, in late November, bitcoin soared quickly to a price of $11,400, again in round numbers, and proceeded to tumble. Some reports concluded that the party was over (see Chart 1).

bitcoin formed a flag pattern, or a counter-trend pullback. And on Dec. 1, it failed to trade down to the pattern’s bottom in a classic warning that the bulls were regaining the upper hand.

The upside breakout came later that day and bitcoin quickly ran up to $11,700.

There are numerous examples on the hourly chart including triangles and head-and-shoulders patterns, both successful and unsuccessful. The important point about failed patterns is that they still give us good information about where the market is heading.

The Dec. 11-14 head-and-shoulders pattern failed to break down, and that quickly led to not one but two measured upside targets, including the Bitstamp record high of $19,666. It also set up support and resistance levels that worked nicely for the rest of the month.

Currently, bitcoin just broke down from a rising pattern from its Dec. 22 low. Pundits can blame the news that South Korea said it would try to regulate this market. But, for me, it was a pattern breakdown, a rebound and then failure at resistance. Indeed, momentum indicators flashed their warnings two weeks ago.

In other words, basic technical analysis went negative over the course of the past few weeks, even as bitcoin set record high prices.

With bitcoin, there are no analyst guesstimates about future earnings. There are no interest-rate worries. There are no macro- or micro-economic concerns to distract from the charts. And there are no artificial market hours to create trading surges at regulated times.

As Chris Carolan, proprietor of SpiralCalendar.com, put it, “The bitcoin time series is the purest expression of human fear and greed response cycles ever constructed.”

Carolan also pointed out that trading action since the start of the year followed an arc based on the Fibonacci series. He called it a chart of mathematical perfection and generously posted it on his Twitter feed for all to see.

Without getting too wonky, the Fibonacci series of numbers from the world of mathematics describes many natural phenomena from the spiraling of a snail’s shell and how flower petals sit around their center all the way up to how galaxies are built. It makes sense that it would also describe how a purely technical market trades.

The bad news for crypto enthusiasts is that bitcoin broke its Fibonacci arc to the downside. Similar to the break of a major trendline or moving average, it tells us the glory days for bitcoin are over -- at least for a while.

Moving back to my simpler chart projections, the larger December head-and-shoulders pattern on the daily chart targets about $8,760 on the downside. That’s not even close to a 90% crash but we’ll have to see what happens if and when the market gets there.

Further, as with all speculative frenzies, the fall tends to erase the entire speculative run-up. For me, the final phase began in November at about $8,100. Therefore, a good first target zone is in the mid-$8,000s give or take a healthy percentage.

Remarkably, that only takes the market back to late November. While a hefty 50% price retracement, it is not much of a time retracement.

If we consider that the speculative phase started in May at a price of about $1,400, going back to November would only be a one-month pullback in an eight-month rally. The big problem for bitcoin investors is that the downside target could be as low as $1,400 as this whole fever unwinds. In my November column, I suggested $1,200 was the number.

If you think this matches the trajectory of the Dutch Tulip Bulb bubble and crash of 400 years ago, you may be right.

For now, I do not want to tell the market where it needs to go. The signs suggest -- at least for now -- that there is significant downside ahead. However, at the same time, they do not tell us whether it will merely be a correction or the end of bitcoin as we think we know it.

Should the market find its legs soon and climb back above resistance at about $16,000, then all bearish bets have to be taken down. In that case, maybe an upside target of $25,000 would be conservative.

Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We’ll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

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